Page 43 - Buy Russia - bne IntelliNews monthly magazine April 2017

bne April 2017 Cover Story I 43
cial investors into Russia. “What you have to do is stock pick amongst the sectors as each one has some stand-out stories.”
Magnit: the super supermarket
The poster boy of retail stocks has long been regional supermarket chain Magnit, which put in blistering rates of growth in the last decade by ignoring Moscow and expanding its chain in small towns and cit- ies, where the majority of the population live. It is now one of the largest supermar- ket companies in Europe with an annual turnover of the order of $10bn a year.
Magnit became the “tourist” stock of Russian equity for investors looking
for some Russian exposure to super- charge their funds’ returns, but without a specific mandate to invest in Rus-
sia. In the past the Yukos oil company, state-owned energy giant Gazprom and state-owned retail banking behemoth Sberbank have also played this role.
X5 Retail Group: the new champ
However, Magnit’s long rally seems to be over after shares were flat over the whole of 2016. Rival X5 Retail Group has taken over the mantle of top supermarket stock after its stock price almost doubled in 2016. In the last quarter of 2016 X5 even outsold Magnit, whose sales have been hurt by contracting real incomes in the regions.
“Overall 2016 revenue of X5, which runs the Pyaterochka, Perekrestok and Karu- sel retail food chains, was RUB1.026 trillion ($17.2bn), 27.5% up year-on-year and the highest increase since 2011. A dramatic rise in retail space drove the growth as the company added roughly 1mn sq metres last year, an increase of 29.1% y/y,” VTB Capital said in a note.
X5 is likely to become the biggest super- market in Russia in 2017 but it makes a
7% profit margin on each sale against Magnit’s 10% margin. Magnit’s founder Sergey Galitsky doesn't seem to care about being number one; he says he is more interested in building a sustainable business than superlatives. “The top spot is not for us,” Galitsky told analysts. “We are for a profitable business.”
Aeroflot: dinosaur no more
There is a rule of thumb for investing
in emerging markets: avoid the state- owned companies and overweight the best private companies. That rule doesn't work in Russia. Two of the best stocks on the market are both owned by the state: Aeroflot and Sberbank. Both companies have transformed themselves from Sovi- et-era dinosaurs (in the 1990s Aeroflot’s mascot was a flying elephant) into the best companies in their respective classes.
Aeroflot has been a market darling for several years. Business was hurt by tourism bans on Egypt and Turkey, both due to political rows and terrorism fears, but its business was bolstered by the col- lapse of its nearest rival Transaero.
Like many of the hot stock picks for this year the company reported its best ever results in 2016 with net IFRS profit of RUB38.83bn (€628mn) versus net loss of RUB6.5bn in 2015, Aeroflot said on March 2. Its share price will be helped even more by the proposal floated in March to share this extra money with investors by increasing dividends to 50% of income for the first time.
Last year, Aeroflot, which unites the
f lagship company Aerof lot, and low- cost operators Pobeda, Rossiya, and the Far-Eastern Avrora airline, enjoyed a 14.8% year-on-year bump in passenger turnover to 112bn pkm, and passenger traffic added 10.3% to 43.4mn.
"The rapid growth in traffic volumes is posi- tive for Aeroflot's share price performance and supports our [positive] view on the company," Gazprombank said in a research
note after the results were released. And this year the company intends to keep up the pace, guiding for passenger traffic to grow by another 12-14%.
Sberbank: the gorilla in the sector
Sberbank has been transformed from a Soviet-era dinosaur with famously surly service into one of the most modern banking institutions in Russia and a new player in Central Europe.
The change is thanks to the stewardship of CEO German Gref, who began life as an academic before being appointed by Putin at the start of his reign to oversee a liberal reform plan, dubbed the Gref plan.
Gref brought the same no-nonsense lib- eral thinking to running Russia’s biggest retail bank. In 2015 Sberbank’s profits equalled the whole sector’s earnings and in 2016 it still accounted for just under three-quarters of all banking profits.
To give a little taste of Gref’s management style he recently turned up at one of the branches wearing a special suit that mimics multiple disabilities including the inability to walk properly, deafness and blindness and tried to open an account to see how well the bank’s services could cope.
The bank leads in terms of deposits and loans and it doubled profit in 2016, mak- ing RUB141.8bn in the fourth quarter alone. Bank analysts covering the sector typically issue two analyses: one cover- ing Russia’s banking sector, and one covering Sberbank, as the stories are so different. The bank’s strong performance is represented by its share price, which almost doubled from $5.38 on December 30, 2015 to $11 on December 30, 2016.
Of course, both Aeroflot and Sberbank enjoy competitive advantages thanks
to their state-owned status, but both benefit from strong management teams, which is still a rarity in Russia, and clear strategies that have made them innova- tors in their sectors.
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